Title : THE MINIMUM SUPPORT PRICE

Date : Jan 25, 2022

Description :

Based on an News Article published in the ‘The Indian Express’ Website

 

Useful for UPSC CSE Prelims and Mains (GS Paper III)

 

What is Minimum Support Price (MSP):

• Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
• MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall in price during bumper production years.
• The minimum support prices are a guarantee price for their produce from the Government.

 

What is Minimum Support Price (MSP):

 

• The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
• In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

 

Historical Perspective of MSP:

 

• The Price Support Policy of the Government is directed at providing insurance to agricultural producers against any sharp fall in farm prices.
• The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall.
• Till the mid 1970s, Government announced two types of administered prices:
• Minimum Support Prices (MSP)
• Procurement Prices
• Since there were too many demands for stepping up the MSP, in 1975-76, the present system was evolved in which only one set of prices was announced for paddy (and other kharif crops) and wheat being procured for buffer stock operations.

Who announces the Minimum Support Price (MSP):

 

• The Cabinet Committee of Economic Affairs announces MSP for various crops at the beginning of each sowing season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). 
• CACP is an attached office of the Ministry of Agriculture and Farmers Welfare.
• The CACP takes into account demand and supply, the cost of production and price trends in the market among other things when fixing MSPs.

 

Factors taken into consideration while announcing Minimum Support Price (MSP):

• Demand and supply
• Cost of production
• Price trends in the market, both domestic and international
• Inter-crop price parity
• Terms of trade between agriculture and non-agriculture
• A minimum of 50% as the margin over cost of production
• Likely implications of MSP on consumers of that product

Factors taken into consideration while announcing Minimum Support Price (MSP):

 

• CACP submits two separate reports for Kharif and rabi seasons and based on these, centre fixes MSPs twice a year.
• CACP considers the following three costs while recommending MSP:
• A2 which covers all the cash and kind expenses of the farmers.
• A2+FL which takes into account the estimated value of the unpaid labour of family members.
• C2 which includes A2+FL along with the interests foregone.

 

Crops for which MSP is announced:

• The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
• The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.
• In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively

 

Why MSP is so important:

 

• To safeguard farmers from the market price fluctuations.
• The prices of farm commodities are dependent on various factors such as good harvest season which leads to fall in prices.
• In such cases, farmers might not prefer to sow the aforesaid crop next season.
• MSPs would encourage farmers to sow these crops and thereby maintain a healthy supply.

 

Market Intervention Scheme:

 

• It is a price support mechanism for those horticultural commodities which are not supported by MSP.
• The commodities covered are mostly perishable in nature. The scheme is similar to MSP but is temporary in nature.
• It is implemented for a limited period on the request of the concerned state government.
• The objective of this scheme is to protect the growers of horticultural crops from distress sales in the event of a fall in prices.

 

The Three Farm Bills introduced by the Central Government:

 

• The centre has recently passed three farm bills namely:
• The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020
• The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 202
• The Essential Commodities (Amendment) Act,2020 

 

 

Benefits of the Farm Bills:

• Higher prices for farmers for their produce since restrictions to sell in the physical premises of mandis has been done away with.
• They provide for a 3level dispute settlement mechanism- conciliation board, sub-divisional magistrate and appellate authority.
• A guaranteed price for the product to be mentioned in the agreement between farmers and businessmen.
• Direct selling of the products through electronic trading is also permitted.
• The State governments are prohibited from levying market fees for trading outside the trade area.
• Strict rules and fines for violation of agreements are mentioned in the bills.

 

Drawbacks of the Farm Bills:

 

• No clarity or mention regarding the MSP in the proposed laws.
• No involvement of Judiciary in the dispute settlement mechanism.
• Farmers’ concern that their interests would be ignored in case of disputes with large corporate houses.
• Under contract farming, there is a fear of becoming slaves to corporate buyers on one’s own land.

 

 

Issues associated with MSP:

 

• The Crop production is still unviable despite of so many years of crop production:
• Even after so many years of operation, the crop production is still increasingly unviable.
• The support prices that are being provided do not increase at par with increase in cost of production.
• A rating agency, CRISIL pointed out that the increase in MSP has indeed fallen in the years between 2014-17.
• While in the years 2009-13, the annual growth of MSP was around 19.3%, it has become only 3.6% in 2014-17.

 

 

Issues associated with MSP:

 

• It has been observed that this decrease in MSP has contributed further to the acceleration of distress of farmers.
• This deceleration in rates especially at a time when agricultural prices in domestic market have become equivalent to the international prices, leading to rise in competition from low cost imports.
• Unequal access to MSPs:
• This problem has been in existence since the creation of this scheme.
• The benefits of this scheme do not reach all farmers and for all crops.

 

 

Issues associated with MSP:

• There are many regions of the country like the north-eastern region where the implementation is too weak.
• Effects of Inflation on MSP:
• There are instances of procurement below MSP as procurement is tardy and trade and other policies sometimes reduce the market prices during good harvest years also.
• It has an impact on inflation
• Lower the market price; lower the MSP and eventually market prices become dependent on MSP due to market intervention measure.
• Disadvantages of procurement:
• Almost 2/3rd of the total cereal production is taken through the route of MSP, leaving only 1/3rd for open market.
• As a result, a farmer who chooses the MSP route cannot take advantage of beneficial market prices and has to depend solely on the MSP.
• It prevents earning of profit by producers.
• This has created shortage of crops in the open market also which has a serious impact on consumption pattern.
• It has shifted consumption towards non-cereal foods (that are available more in open market relatively), but production has not risen simultaneously, causing a production-demand gap.
• Excess storage:
• This kind of procurement without sufficient storage has resulted in huge piling of stocks in the warehouses.
• The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.
• So, many grains have rotten in the storages.
• Issues in WTO:
• India’s MSP scheme for many crops has been challenged by many countries in the WTO.
• For example, Australia has complained of the MSP on wheat, US and EU complained of sugarcane and pulses MSP.
• They have been claimed to be highly trade-distorting by its method of calculation.
• If the current process continues, the country will face international criticism for breaching the 10 per cent norm for subsidy on farm production set by the WTO.

 

 

Rectifying Measures:

 

• Recent budget initiatives:
• In latest budget, states have been allowed to intervene in the agricultural markets to ensure that the prices do not fall sharply.
• The Centre will be bearing 40% of the losses that the states suffer and in case of North-Eastern states the Centre will bear the loss upto a limit of 50%.
• The coverage will be of every commodity except rice and wheat.
• This scheme has been named as ‘Market Assurance Scheme’.
• WTO negotiations:
• India has been able to gain some time by pushing for inclusion of a peace clause in the 2013 Bali Conference wherein every country agreed not to charge another country for its subsidy scheme until a permanent solution is drawn.
• Although the solution is yet to be drawn, the deadline for its activities are nearing, requiring immediate efforts.
• Priority based procurement:
• The procurement must be done on priority basis for the states or farmers who are more in distress and require immediate assistance.
• It should be ensured that the MSP does not cause fall in prices due to the interventionist measures.
• Even after so much of criticism, it is undoubted that the scheme is a necessity in times of distress.
• There is a need to consolidate and relook into the scheme and ensure that it is properly implemented.
• The CACP, in its price policy report for the 2018-19 kharif marketing season, had suggested enactment of a legislation conferring on farmers ‘The Right to Sell at MSP’. 
• This, it felt, was necessary “to instil confidence among farmers for procurement of their produce”.
• The government should be promoting crop and animal agriculture that also leads to consumption of foods rich in proteins, vitamins, minerals and dietary fibre — as opposed to just calories and sugar — by the people.
• The right way to do it is by freezing the MSPs of paddy and wheat, besides capping their procurement at, say, 10-15 quintal per acre per farme

 

Recommendations of the MS Swaminathan Commission:

 

• Insertion of Agriculture in the concurrent list of the constitution.
• Addressing the issue of land reforms and inequalities in landholdings.
• Increasing the investments in agriculture-related infrastructure.
• Establishment of soil testing laboratories for detection of micronutrient deficiency.
• Ensuring the availability of formal credit to the farmers.
• Setting up of Village Knowledge Centres or Gyan Chaupals.
• Ensuring the availability of farm inputs at affordable rates.
• Restructuring the microfinance policies.
• Focused Market Intervention Scheme for live-saving crops.
• Inclusion of millets and other nutritious cereals in PDS.
• Investing in post-harvest management to reduce the losses and facilitation of direct farmer- consumer linkage.
• MSP support to be provided to crops other than for paddy and wheat.
• Steps to be taken for forming a single Indian market which promotes grading, branding and packaging.

Tags : swaminathan panel, farm bills